“Jack Ma is an Icon for China’s Private Sector”

Duncan Clark, author of The House that Jack Ma Built, on how Jack Ma and Alibaba are a symbol of the transition that the Chinese economy is making.

Jack Ma is an enigma in China, and not without reason. With humble beginnings in the Chinese city of Hangzhou, Ma went on to create an e-commerce titan that has grabbed the attention of not just China, but also the world. Today Jack Ma and Alibaba’s story has become the stuff that legends are made of.

Duncan Clark, a technology and financial expert specializing in Chinese markets, has witnessed Jack Ma’s dizzying rise in China’s e-commerce firmament. Clark, a former investment banker at Morgan Stanley who came to China in 1994, first got to know Jack Ma in 1999. He met him in the small Hangzhou apartment where Ma and his friends famously founded Alibaba. In his book Alibaba, the House that Jack Ma Built, Clark describes, with resourceful firsthand knowledge and interviews, how Ma made a dramatic transformation: from a teenage boy looking for foreign tourists to practice English in Hangzhou to the owner of Alibaba, the largest e-commerce company in China. Today the boy from Hangzhou is seen shaking hands and conferring with world leaders and is important enough to get invited to the White House.

In this interview, Clark, who is the founder of investment consultancy firm BDA China, talks about Alibaba’s incredible story and its impact on China.

Interview excerpts:

Q. You’ve been in China for over two decades. How do you think Alibaba’s rise has influenced the tech industry and in general, the Chinese economy? Why is Alibaba so important for China?

A. I think Alibaba is a symbol and Jack Ma is an icon for China’s private sector. It’s relatively new on the global scene to see an entrepreneur, a company having such a big impact. In 2014 we saw Alibaba’s groundbreaking IPO, which is still the largest IPO in history.

But more than the financial aspects, the impact Jack is having on the Chinese economy is being increasingly understood. China is trying to move from a ‘Made in China’ past to a ‘Designed in China’, ‘Consumed in China’ future, and Alibaba is really a symbol of that transition.

(Watch the video below)

Q. What is Alibaba’s likely impact on global e-commerce?

A.In terms of Western e-commerce, it’s not frankly going to have a near-term impact. Companies like Amazon are extremely dominant in the US, Western Europe and other markets. But actually it is in emerging markets, for example in India, where we see Alibaba having its greatest impact.

But over time Alibaba is investing in things like entertainment: for example, in Hollywood. So we will see Alibaba’s impact in these markets. But I think the near-term impact is more in South-South, the emerging markets that have links with China.

Q. Jack Ma is very different from other Chinese entrepreneurs. How did that influence Alibaba’s development?

A. Jack is an unusual tech entrepreneur. First he is really not a tech person. He’s famous for having struggled at math… it’s kind of an unlikely story. His story is kind of larger than life. He emerged from very unlikely origins to become this global tech figure. But ultimately he’s always good at building a team around him. So his own deficiency of not knowing technology actually becomes an advantage for the company. They have to build a team culture that allows the company to apply common sense solutions using technology.

Q. What kind of common sense solutions?

A.Jack will say if he doesn’t understand a product, he wouldn’t want it to be offered to the public. Because he doesn’t understand technology, he would often be the last person within the company to view something before it went live. Jack doesn’t want technology to be a wall to the common person, he sees himself very much as a typical consumer. And he was actually an entrepreneur even when he was a teacher. He was selling things on the street. So he always understood what it is like to be a small merchant effectively.

Having sold plastic carpets on the streets of Hangzhou just to supplement his income, he knew, for example, that with Taobao, it was important to offer the virtual stores to these companies for free. So when eBay was trying to charge small merchants to set up their wares online, Jack was insistent that Alibaba would always offer these services for free.

In fact, eBay laughed at Alibaba in the early days, saying that free is not a business model. Of course, ultimately it isn’t but you have to find other ways—in this case, through advertising—to generate income.

Q. In the book you talk about Jack Ma’s relationship with an Australian called David Morley. Why is meeting David Morley important for him?

A.I think with all entrepreneurs we try to understand how they get their lucky break. If you think of the early 1980s, China was still very much a state-run economy. Jack, when he was 15 years old in 1980, approached an Australian tourist, a boy who was then 12, offering his services, to show him the town. Jack would regularly walk up to tourists in the city to offer his services as a tour guide, in exchange for practicing his language. In the case of the Morley family, there were three children plus two parents visiting in 1980. This was the beginning of their relationship. That actually, I think, changed Jack’s life. The Morley family ended up having a long-term pen-pal relationship [with Jack] but also brought him to Australia and actually helped him financially in his early years, including when he got married [they] bought them an apartment in Hangzhou.

In a purely state-driven economy back then, to have some oxygen, some outside [support] to go against to the grain, it was very important.

Q. During the development of Alibaba, what were some of the important decisions that helped shape the company? What can other companies learn from them?

A.I think entrepreneurs can learn from their mistakes and understand their weaknesses. In the book I describe how others tried to create an Amazon in China, eBay in China, early on, but it was too early, those companies failed. So in a sense, Jack knew he found a business model which allows him to raise capital, but ultimately he realized there were limits to that, and he also had to cut back a lot. They had some international expansion very early on, they had some money, but as he said money could actually often damage or destroy a company because it allows to expand in too many directions.

So the first B2C [business] of Alibaba was not business to consumer, it was ‘back to China’. Alibaba laid off people, closed overseas offices and pulled people back to Hangzhou to focus on what was really important and that became the origin for their new B2C, business to consumer model.

Q.Alibaba is facing some challenges today, such as the backlash over counterfeit products being sold on its platforms and the investigation by the Securities and Exchange Commission (SEC). How will these problems affect Alibaba’s development and how will it solve them?

A.Today with things like the SEC investigation and other questions, some investors are concerned: can they really trust the numbers, the structures? It’s an interesting parallel: consumers in China use Alibaba services happily every day and also services like Alipay, but investors still scratch their heads. Some of them are amazed at the scale of it, some say: ‘can this be true?’ and others worry if this can be sustained. So there is an odd parallel between the trust of consumers and some questions being raised by investors.

We’re going to see more efforts, maybe with the SEC investigation being an opportunity to clear the air. But it’s risky: if they don’t get it right, this could complicate their plans. They do plan to list the Ant Financial asset, which is huge. Ant Financial will be bigger than Alibaba itself.

Q. Alibaba is also expanding and investing in overseas market. What are its chances globally and what are the challenges it is up against?

A. In one sense Alibaba is already a global company, having raised so much money on the NYSE, also Jack increasing being an iconic business figure, not just in the Chinese context, he is an international figure. But Alibaba as a business, is less international given that Alibaba’s home market China is so large and they’re so dominant.

They’re such a large e-commerce [company] here, [so] trying to leverage that, for example to invest in southeast Asia—they just invested $1 billion into Lazada by acquiring that company.

Maybe they can connect some of the merchants they serve in China to the global markets. But I don’t think we’re going to see Alibaba making a big investment in the US’ core e-commerce areas for example, certainly not taking on Amazon. Potentially some speculate eBay might be an interesting partner for them in the future. But I think Alibaba is going to be pretty cautious in the developed markets. It already tried with their website called 11 Main to target US consumers and it didn’t work.

However, we’re seeing Alibaba investing in high-profile assets acquiring not only in Hong Kong with South China Morning Post, but also in Hollywood building up Alibaba Pictures. This year we’ll see the Alibaba Pictures name flash on the screens in blockbuster movies like the Star Trek series. But some of the impact is more in terms of an image than reality.

In emerging markets though, we will see more presence by Alibaba in the e-commerce sector. In the world increasingly we will see the US-dominated internet, the China-dominated internet and we’re seeing the rest of the world, like how do US and Chinese companies fight for space, for example in markets like India. This is going to be a very interesting battleground.

Q.How do you see Alibaba’s next five years?

A. Alibaba has a long-term vision they described as the “Two H” strategy, which is health and happiness. It’s a pretty fluffy terminology, but in the healthcare industry I think there is a growing awareness that China is facing massive healthcare challenges, linked also to environmental problems. Both Jack Ma and [CEO] Joe Tsai have put aside 3% of the company towards philanthropic goals, particularly in the environmental area. On the happiness side, it’s more of an entertainment-driven kind of vision, bringing in more compelling content to Chinese consumers.

And what that speaks to is really Alibaba wants to get away from just being in the package business—like deliver packages from A to B, already raises questions of cost and how they coordinate with these logistics companies.

So the dream is to move beyond the physical to the virtual world, particularly into big data. The fact that people are looking at Alibaba, paying with Alipay everyday creates huge amounts of data. The idea is they can start using cloud computing and other services to understand the psychology of the Chinese consumers and play a role in reshaping the new services that are going to be offered to them.

Alibaba is focusing on customers and Chinese customers are changing. It’s no longer the cheap China stuff. I think Alibaba is anticipating Chinese consumers will be spending more and more of their savings on services, not just products. Because at some point, the Chinese houses become saturated, you’ve got the wide screen television and nice furniture and maybe a car and a second car. Things start to move into financial services, so financial services under their Ant Financial is a major part of their future, sort of the services for the middle class.

We are really talking about the emergence of the Chinese middle class, potentially taking over from the US middle class as the motor of global demand.

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